Spain Beats Auction Goal as Cyprus Contagion Risk Fades

A Spanish national flag flies from the roof of the Bank of Spain in Madrid. Photographer: Angel Navarrete/Bloomberg

March 21 (Bloomberg) -- Spain beat its maximum target at a
bond auction and its borrowing costs fell even after a rescue
package designed to keep Cyprus in the euro was thrown into
limbo when Cypriot lawmakers rejected a levy on bank deposits.

The Madrid-based Treasury sold 4.51 billion euros ($5.8
billion) of benchmark bonds, more than its maximum target of 4
billion euros. The two-year security was sold to yield 2.275
percent, down from 2.54 percent on Feb. 21, the five-year 3.557
percent, down from 3.572 percent on March 7, and the 10-year
4.898 percent, down from 4.917 percent on March 7.

Spain is counting on a rally on debt from so-called
periphery countries to last after covering about 31 percent of
its planned mid- and long-term gross funding needs for 2013 in
less than three months. Outstanding public debt in the euro
area’s fourth-largest economy’s surged 20 percent last year,
reaching 84.1 percent of output.

The yield on Spain’s 10-year benchmark bond fell 2 basis
points to 4.9 percent after the auction at 11:08 a.m. in Madrid,
narrowing the spread with similar German maturities to 3.51
percentage points. That compares with 4.92 percent on March 15,
before euro-area finance ministers decided on an unprecedented
levy on deposits as a condition to rescue Cyprus.

Limited Contagion

“The auction went rather well, the fact that the amount
sold was higher than the target with the highest demand for 10-year debt is positive,” said Chiara Cremonesi, a fixed-income
strategist at UniCredit SpA in London. “Peripheral bonds are
performing well for the second day in a row and this auction as
well as the market reaction reinforces our view that the
spillover contagion risk from Cyprus is very limited.”

The European Central Bank said today it will cut Cypriot
banks off from emergency funds after March 25 unless the
country’s government agrees on a bailout with international
creditors. Cypriot lawmakers this week rejected a plan that
would have raised 5.8 billion euros by taxing bank deposits.

Demand for the 2015 note was 4.01 times the amount sold, up
from 3.69 last month, while the bid-to-cover ratio was 3.58 for
the 2018 security, up from 2.32 on March 7. It was 1.89 for the
2023 bond, down from 2.27. The Treasury is due to return to the
markets to sell bonds on April 4.

The yield on Spain’s 10-year benchmark bonds reached a
euro-era high of 7.75 percent in July, before European Central
Bank President Mario Draghi pledged to do whatever was necessary
to hold the single currency together. Prime Minister Mariano
Rajoy hasn’t ruled out seeking European aid that could trigger
ECB purchases of Spanish debt on secondary markets via its so-called OMT program.